In a recent New York Times article, Surprising Truths About Trade Deficits, Gregory Mankiw provides a welcome bit of clarity on trade policy.  Mankiw is a professor of economics at Harvard University, chairman of the Council of Economic Advisers under President George W. Bush and, most importantly, the author of one of my economics textbooks from business school.  In the article Mankiw clarifies some misunderstood concepts around trade policy and, specifically, trade deficits.  Below are summarized points from Mr. Mankiw’s article.

  • Despite all the bluster, bilateral trade deficits are irrelevant.
  • The U.S. aggregate trade deficit reflects our overall spending vs saving, not other countries taking advantage of the U.S.
  • Tax cuts are likely to increase the aggregate trade deficit as an increase in available cash leads to more spending on goods from other countries.
  • The trade deficit is a ‘fake problem’.